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Gold in the 'sweet spot' as wage inflation rises, but is market overbought above $1,900?

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(Kitco News) - Sentiment remains firmly bullish in the gold market as the precious metal finds its sweet spot in financial markets.

Some analysts note that economic data are expected to push inflation pressures higher. Still, the numbers are not strong enough to force the Federal Reserve to tighten its monetary policies anytime soon.

The latest Kitco News Weekly Gold Survey results show that retail investors and Wall Street analysts remain bullish on gold prices next week. However, bearish sentiment is starting to rise as some analysts warn that the market is looking overbought with prices above $1,900 an ounce.

Marc Chandler, managing director, Bannockburn Global Forex, said that gold has seen a strong rebound following disappointing May employment data.

"Still, I would be more inclined to sell on a further bounce," he said. "The MACD and Slow Stochastic are rolling over, and I suspect that all we have seen, so far, is the first leg of what may be a three-leg correction lower."

This week, 16 analysts participated in Kitco News' gold survey. Of those, 11 analysts, or 69%, said they were bullish on gold; at the same time, two analysts, or 13%, said they were bearish on prices next week. Three analysts, or 19%, said they see gold prices trading sideways.

Meanwhile, a total of 1023 votes were cast in online Main Street surveys. Of these, 552 respondents, or 54%, looked for gold to rise next week. Another 301 respondents, or 29%, said lower, while 170 voters, or 17%, were neutral.

Kitco Gold Survey

Wall Street

Bullish
Bearish
Neutral

VS

Main Street

Bullish
Bearish
Neutral

The bullish sentiment comes as gold is looking to see its first negative close in four weeks. August gold futures last traded at $1,896.50 an ounce, down nearly 0.5% from last week.

Although momentum indicators in the gold market are looking stretched, some analysts have said that the precious metal has further upside potential. The fundamental outlook provides strong support for the current uptrend, they said.

While the gold market is looking to close the week in the red, prices are well off the lows after prices dropped 2% Thursday. Disappointing nonfarm payrolls data for May is helping gold recoup its earlier losses.

Friday, the Bureau of Labor Statistics said 559,000 jobs were created in last month; economists were expecting to see job gains of around 645,000. At the same time, wage inflation increased 0.5% last month.

"The latest US jobs report shows fewer new jobs than expected, and a pick up in wages, adding to inflation concerns," said Adrian Day, president of Adrian Day Asset Management. "Increased wages tend to be sticky, and the new hire numbers suggest wages may have to increase even more to entice people back to work. This is dollar negative and gold positive."

Other analysts said that gold's push above $1,900 an ounce in May indicates that the market has solid momentum. Last month the gold market saw its best monthly gains since July.

"Gold broke the key psychological level of $1,900/oz on the monthly close in May and, despite the June 3 pullback, remains in an uptrend," said John Feneck, founder of Feneck Consultants.

Kevin Grady, President of Phoenix Futures and Options, said that despite Thursday's selloff, the gold market is relatively stable within a strong uptrend, and it managed to hold critical support levels.

However, he added that he is neutral on gold because he expects that the Federal Reserve will have to act on rising inflation pressures. He said that gold prices could struggle to hold gains above $1,900 an ounce.

"The Federal Reserve doesn't have a handle on inflation. It is going to be a lot more permanent than they expect," he said. "Gold has room to move higher, but at some point, because of inflation, the Fed is going to have to at least tapper its bond purchase. That will turn the lights out for the gold party."

Darin Newsom, president of Darin Newsom Analysis, said that he is closely watching Friday's close. He added that if gold prices can't close the week above the previous week's close at $1,905.30, then it is headed lower in the near term.

"Gold's direction next week is going to come down to ticks," he said. "One tick below $1,905.30, and I would expect to see lower prices. One tick above, and I would expect to see higher prices."

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